In a perfectly competitive market there is a donut shop that sells 1,200 donuts daily. Each donut sells for the market price of $0.75 and they sell out every day. Assume that this company has labor costs of $275 and materials costs of $400. a. At what price would this donut shop shutdown in the short run? b. Using only variable costs, what is the donut shop’s daily profit? - Now assume that the owner is thinking of adding a second location downtown. The capital investment required is $4,000. The normal rate of return is 5%. c. If the new shop could operate under the same conditions as the original location is it a good business decision to expand?
In a perfectly competitive market there is a donut shop that sells 1,200 donuts daily. Each donut sells for the market price of $0.75 and they sell out every day. Assume that this company has labor costs of $275 and materials costs of $400. a. At what price would this donut shop shutdown in the short run? b. Using only variable costs, what is the donut shop’s daily profit? - Now assume that the owner is thinking of adding a second location downtown. The capital investment required is $4,000. The normal rate of return is 5%. c. If the new shop could operate under the same conditions as the original location is it a good business decision to expand?
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter5: Investment Decisions: Look Ahead And Reason Back
Section: Chapter Questions
Problem 5.7IP
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In a perfectly competitive market there is a donut shop that sells 1,200 donuts daily. Each donut sells for the market price of $0.75 and they sell out every day. Assume that this company has labor costs of $275 and materials costs of $400.
a. At what price would this donut shop shutdown in the short run?
b. Using only variable costs, what is the donut shop’s daily profit?
- Now assume that the owner is thinking of adding a second location downtown. The capital investment required is $4,000. The normal rate of return is 5%.
c. If the new shop could operate under the same conditions as the original location is it a good business decision to expand?
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